Derivatives: Why do we not use compounding for forward rate agreements?

I’ve just gone through the wiley study guide and I am wondering why we do not use interest rate compounding when discounting for forward rate agreements. I.e when discounting the PV or annualising, we use simple interest (e.g. (30/360) x1 + i).

Comparing this with discounting forwards on equity and currencies, where compounding is used with the time factor as the exponent (1+i)^30/360.

Because the rates are given as LIBOR, and LIBOR doesn’t compound; it’s quoted as a nominal rate.

That’s something you’re expected to know about LIBOR.

Hey Magician, why is it so? I don’t remember reading anything that states why LIBOR doesn’t compound, or maybe I just skipped it.

Got me.

But it’s no different in that respect from BEY, which is also a nominal rate; BEY doesn’t compound.

With either one you can get to an effective rate, of course, and that will compound, but as quoted, they don’t.

Oh right. So it is similar to an annualised vs unannualised distinction.

Pretty much.

Thank you so much @s2000 !!

You’re quite welcome.